KOBE: The Bank of Japan (BOJ) should raise interest rates once every few months and stand ready to speed up the pace of hikes, hawkish board member Naoki Tamura said, highlighting the bank’s focus on inflationary risks from the Middle East conflict.
The remarks came in the wake of the central bank’s decision this month to raise its policy rate to a 31-year high of 1%, as the Iran war-induced energy shock adds to price pressures from a tight labour market and rising import costs from a weak yen.
In a speech yesterday, Tamura said companies were passing on rising import costs more quickly, significantly and broadly than in the aftermath of Russia’s invasion of Ukraine in 2022 due to changes in companies’ price-setting behaviour.
Underlying inflation has already reached 2% and upside risks to prices warrant attention regardless of developments in the Middle East, Tamura said, warning that inflation expectations remain on the rise.
“Considering the recent increase in upside risks to prices, what I envisage as a baseline path is raising the policy interest rate by 0.25 percentage points at intervals of a few months towards the neutral interest rate level of 2%,“ Tamura said in a speech to business leaders in Kobe, western Japan.
“If the chance of upside price risks materialising heightens, it’s necessary to accelerate the pace of rate hikes without hesitation by increasing the frequency or size of rate hikes,“ he said.
When asked whether consecutive rate hikes could become an option, Tamura told a news conference that the BOJ could do so if risks for an inflation overshoot materialise.
But he ruled out the need for immediate consecutive hikes, saying the basic approach would be to assess the impact of each move on economic, price and financial conditions before proceeding with the next increase.
“If the likelihood of inflation risks materialising heightens, the BOJ may need to raise rates frequently or at a bigger scale. But I don’t see such a need for now,“ he said.
The BOJ next meets on July 30-31, when it is widely expected to hold rates steady but will update quarterly forecasts that markets will parse for signals on the timing of the next hike.
A former commercial banker, Tamura was among the three board members who proposed unsuccessfully to raise rates in April.
While Tamura’s views are likely more hawkish than others on the board, they underscore growing attention within the bank to mounting price pressures that have kept consumer inflation around the bank’s 2% target for nearly four years.
Though the de-escalation of the Middle East conflict has pushed down crude oil prices, the yen’s slide to near a four-decade low keeps the BOJ under pressure to raise rates and avoid widening the rate differential with the US, analysts say.
“Exchange-rate moves are among key factors affecting Japan’s economy and prices. With corporate wage- and price-setting behaviour having changed, currency fluctuations have a bigger impact on inflation than in the past,“ Tamura said.
Political pressure, however, could complicate further tightening.
Japan’s government will call for monetary policy that bolsters private demand, a draft of its long-term economic blueprint seen by Reuters showed, signalling its preference for the central bank to keep borrowing costs low.
A Reuters poll taken before the June hike showed most economists projecting a rate increase to 1.25% in the fourth quarter.
